The stocks markets for countries simultaneously reaching all-time highs and then declining by 10% or more within 10 days is unprecedented. However, there have been cases of this occurring for the US markets. For all three cases, the corrections became crashes with minimum declines of 34% within two to 25 days after the corrections commenced.
Statistical probabilities for the indices of the four countries based on the 1929, 1987 and 2000 crash statistics:
- 100% probability for minimum declines of 34%
- 66% probability for declines of 44% from 2020 peaks to troughs
- 66% probability for declines of 77% before getting back to all-time highs
- 100% probability it will take 1½ to 25 years before exceeding February 19, 2020 highs
- 66% probability that indices will bottom in Q4 of 2022
The significant declines coming for the indices of the four developed countries has increased the likelihood of an epic global market crash. Crashes which begin in a particular country can become viral and cause crashes in other countries. The 10% plus correction for the Dow Jones composite index, which began on October 5, 1987, is a good example. The Dow’s correction spread to the Nikkei and its decline of 21% began on October 14, 1987; the day after it reached its all-time high. The interaction between the US and Japanese markets likely fueled the infamous “Black Monday” crash which occurred on October 19, 1987.
The crashes which began for the Dow in 1929 and the NASDAQ in 2000 occurred at the end of secular bulls and the beginning of secular bear markets. The Dow’s 1987 Black Monday crash caused minimal damage to the secular bull which began in 1982 for two reasons:
- At the age of five years old, the secular bull was an adolescent. Since 1802, the minimum lifespan of a secular bull or bear has been eight years.
- The fall of communism, which began in 1989, helped the 1982-2000, secular bull to climb back above its October 1987 pre-crash high by July of 1989
Since the Dow’s 1987 Black Monday crash occurred two days after the index’s 10% correction, most investors did not have an opportunity to get out. However, after the 1929 Dow and 2000 NASDAQ had corrected by 10%, investors had opportunities to sell out.
After the NASDAQ, in 2000 declined by 11% from March 5th to 15th, investors had until March 29, 2000 to sell out before the index began to plumb new lows.
On April 14, 2000, which was 25 days after the correction began, the NASDAQ had declined by 34%. It took the Dow 10 days to reach the 34% decline threshold from October 17, 1929, after its initial 10% correction occurred within a 5-day period.
From researching the 1929 crash and 2000 dotcom bubble crash the indices will decline by more than 70% from their peaks and hit their bottoms sometime in the fourth quarter of 2022. The 1929 crash bottomed in 32 months and the NASDAQ 30 months after their corrections began.
The February 19, 2020, correction is especially worrisome for the US stock market and economy. The NASDAQ and S&P 500 were the top performing of the five global indices for the 12 months ended February 19,2020.
For the 12 months prior to the to the dotcom bubble bursting in March of 2000, the S&P 500 lagged the NASDAQ and the three foreign indices. The low performance of the index mitigated the negative impact that the collapsing NASDAQ could have had on the US economy.
The S&P 500’s underperforming was a blessing since for the 12 months ended March 2001, its 12% decline was much lower than the rates of decline for the five other indices.
The post 10% swift correction from a market peak behavior for precious metals further support my findings for the equities markets. Since 1979 the prices of both gold and silver each corrected swiftly by 10% or more twice. On all four occasions the prices of the precious metals went on to crash by a minimum of 34% after experiencing minimum 10% corrections within the same time frames as the two Dow crashes and the NASDAQ crash.
My prediction is that the S&P 500’s secular bull market which began in March 2009 ended on February 19, 2020. The ninth secular bear since 1802 began on February 20th. Based on the peaks of the last three secular bull markets as compared to the troughs of the of the three most recent secular bears, the S&P 500 could decline by an additional 47% to 80% from its March 6, 2020 close.
The video of my “Secular Bulls & Bears: Each requires different investing strategies” workshop at the February 2020 Orlando Money Show is highly recommended. The educational video explains secular bulls and bears and includes strategies to protect assets during secular bear markets and recessions, etc.